The World Bank Brazil-Salvador Social Multi-Sector Service Delivery Project (P162033)

B. Introduction and Context

Country Context

After growing at an annual average of 3.6 percent (2006- 2013), Brazil's economy suddenly fell into a deep recession in 1 2014. GDP contracted by 4.6 percent in 2015 and is projected to contract by another 4.1 percent in 2016. An estimated 2.7 million formal jobs have been lost since the onset of the recession with particularly strong impact on youth employment. The crisis has hit subnational government finances hard. In the aggregate, federal transfers to states and municipalities dropped by 8.9 percent in real terms between 2014 and 2016. Combined with the decline in their own revenue collection due to the economic contraction and the expenditure rigidity due to the relatively high levels of mandatory expenditures (e.g., salaries and retirement benefits), some subnational governments have been forced into defaulting on their financial obligations. Strong fiscal consolidation and aggressive structural reforms are deemed necessary for Brazil to regain a sustainable growth trajectory. However, this fiscal scenario threatens Brazil's gains in poverty and inequality reduction since the early 2000s unless complementary measures are taken to protect those expenditure programs that are known 2 to be effective in protecting the poor and the vulnerable and to enhance efficiency of public spending. The Municipality of Salvador, capital of the State of Bahia, is the third largest city in the country (2.9 million people in 3 2014, IBGE) and the twelfth largest municipal economy in the country (R$38.8 billion in 2011, IBGE). The service sector is the most important driver of the municipal economy, generating 70 percent of the city's annual GDP (IBGE, 2011). Besides the state and municipal public administrations that operate in the city, the largest sectors within the service economy in Salvador are tourism, transport, and construction. Salvador saw a faster pace of decline in poverty between 2001 and 2013 (73 percent) than the national average (52 percent). Nevertheless poverty remains high (7.2 percent) compared to more affluent cities like Belo Horizonte (2.8 percent), although it fares better in comparison to two large cities in the Northeast (Figure 1). Moreover, Salvador is the second most unequal city in the country in terms of income distribution, just behind Brasilia, with a Gini of 0.57 in 2012.

The current mayor of Salvador was reelected for his second and final term in October 2016 with more than 74 percent of the popular votes cast in the municipal election. During the first term (2013- 2016), the mayor's administration has implemented an ambitious plan to accelerate the pace of poverty and inequality reduction in the city. The municipality's strategic plan 'Salvador -Building a new future 2013- 2016' prioritized investments to expand supply of basic social services (Education, Health and Social Assistance) as well as improvements in urban mobility, urban infrastructure, tourism and public management. While Salvador requires additional investments in selected areas to ensure adequate service coverage in specific sub-sectors (e.g., pre-primary education, basic social assistance), the administration is now shifting its primary focus toward efforts to improve quality and ensure sustainability of these social services.